DOCSLIB.ORG

The Impacts of Profitability, Liquidity, Leverage, Firm Size, and Free Cash Flow

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
The Impacts of Profitability, Liquidity, Leverage, Firm Size, and Free Cash Flow International Journal of Business, Economics and Law, Vol. 22, Issue 1 (AUGUST) ISSN 2289-1552 2020 FINANCIAL DISTRESS: THE IMPACTS OF PROFITABILITY, LIQUIDITY, LEVERAGE, FIRM SIZE, AND FREE CASH FLOW Angela Dirman ABSTRACT The research objective to be achieved is to provide understanding and knowledge to the public, especially investors and creditors about the effect of profitability, liquidity, leverage, company size, and free cash flow on financial distress and can be used as a reference for future researchers and stakeholders (investors, creditors, and government) in making relevant and reliable decisions. The method used is quantitative research with secondary data taken from the issuer's financial statements on IDX with data collection techniques using the purposive sampling method. Analysis of the data used is multiple linear regression. The population in this research is manufacturing companies of basic and chemical industry sectors which are listed on the Indonesia Stock Exchange which is conducted for 3 years of observation, namely 2016-2018. The sample is determined by the purposive sampling method so that as many as 90 samples are obtained. The analysis technique used is the statistical test t, and the classic assumption test which includes normality test, multicollinearity test, heterokedasticity test, and autocorrelation test. The results of this study indicate that the profitability variable has a positive effect on financial distress; variable liquidity, leverage, and free cash flow do not effect financial distress; and firm size variables have a negative effect on financial distress Keywords: Profitability, Liquidity, Leverage, Company Size, Free Cash Flow, Financial Distress INTRODUCTION The global economic crisis is an event in which all sectors of the world market economy experience collapse (degression) and affect other sectors throughout the world. The global economic crisis occurs due to unavoidable market economic problems around the world due to bankruptcy and turbulent economic situations. The most visible sector due to the effects of the global economic crisis is the economic sector from the smallest to the largest. Including stock exchanges in the Middle East, Russia, Europe, South America and North America. No exception in the US itself, investors on the Wall Street Exchange suffered huge losses. In Indonesia, the real sector has been affected by the global crisis. The sectors most affected by the global crisis are those that rely on external (tradable) demand, such as the manufacturing, agriculture and mining industries (kompas.com). In addition to the global financial crisis, the start of free trade between ASEAN countries also affected the company's performance. The more freely foreign companies enter Indonesia, the competition between companies is increasing. Companies that cannot survive facing the situation indicate that the company has experienced failure which is indicated by financial distress. Companies that experience financial distress will experience difficulties in generating profits in a reporting period, besides that the company also experiences difficulties in fulfilling its short-term obligations to third parties such as investors, creditors and employees (Rahmawati, 2014). As in manufacturing companies that are not free from financial problems. One of the companies experiencing financial distress is PT Citra Maharlika Nusantara Corpora Tbk. (Cipaganti). The company previously named PT Cipaganti Citra Graha Tbk was declared bankrupt on April 27, 2017 because the peace proposal was rejected by the majority of creditors. This bankruptcy case also stems from the PKPU Cipaganti status since October 31, 2016. The company's total debt amounts to IDR245 billion. Another case that befell a company listed on the IDX is PT. Berau Coal Energy, which was sued for bankruptcy by creditors because it failed to pay off maturing debts. PT. Berau Coal Energy Tbk has defaulted its US $ 450 bond debt maturing on July 8, 2015. The 12.5 percent coupon bond was issued by Berau Resources Pte Ltd in Singapore and guaranteed by PT. Berau Coal Energy Tbk. The delay in repaying the debt is then interpreted as the inability of the company to settle its debt burden so that it is reported to have gone bankrupt or bankruptcy. According to Platt & Platt (2002) financial distress has been defined as a decrease or even a condition of decline. Financial distress becomes an interesting topic in the financial sector and financial health companies as an important indicator for users who are interested in knowing more about company performance (Pernamasari, Purwaningsih, Tanjung, & Rahayu, 2019). Information regarding finances is used by people who are at the same time as people who are at an early age. So that the damage and even the parties to the worst conditions are still very poor. When a company experiences financial difficulties, it will be a consideration for investors and creditors who will invest their capital. Thus, companies should be able to show good company performance to be able to attract investors (Widhiari & Aryani Merkusiwati, 2015). The performance of an entity can be seen from the analysis of financial statements. The results of the analysis of an entity's financial statements can be used as material for decision making and decision making for company owners, managers and investors. Financial statement ratio analysis can azlso be used as a medium to predict financial difficulties faced by companies (Widhiari & Aryani Merkusiwati, 2015). Prediction errors in the future will be fatal in the survival of the company, prediction errors result in loss of income or investment that has been invested into the company. The importance of a bankruptcy prediction analysis is very much needed by several related parties, such as investors, banks, the government, and primarily the company itself. The correct prediction will also make the company know in advance the company's financial condition (Rohmadini, Saifi, & Darmawan, 2018). According to Li & Du (2011) research on financial distress generally uses financial indicators to predict the condition of a company in the future. Financial indicators in this study are profitability ratios, liquidity ratios, and leverage. In addition to using indicators of corporate financial performance, in this study there are also other factors namely firm size and free cash flows. 17 International Journal of Business, Economics and Law, Vol. 22, Issue 1 (AUGUST) ISSN 2289-1552 2020 Profitability is the company's ability to generate profits. Where profit is one indicator of how well the company's performance. Profitability includes all revenues and costs incurred by the company as the use of assets and liabilities in a period. The main purpose of the company is to have high profits. High profits will increase the welfare of its shareholders and will increase the interest of investors to invest their funds in the company. High profits will also illustrate the level of success of the company in carrying out its operational activities (Rohmadini et al., 2018). If the level of profitability of the company is getting higher, it is unlikely that the company will experience financial distress. Ananto, Mustika, & Handayani (2017) and Curry & Banjarnahor (2018) in their research found that profitability had a negative effect on financial distress, but in Rohmadini et al., (2018) profitability measured by ROA had no effect on financial distress. In addition to profitability, financial distress can also be predicted through a liquidity ratio. Liquidity ratio is the ratio used to measure how liquid a company is (Kasmir, 2012). Short-term creditors are very concerned with this current ratio because the conversion of inventories and accounts receivable to cash is the main source, from which companies can wash cash to pay short- term creditors. From the point of view of short-term creditors, the higher the current ratio of companies the greater the protection (Gamayuni in Triwahyuningtias & Muharam (2012). Curry & Banjarnahor (2018) found that liquidity had a negative effect on financial distress, while the results of Rohmadini et al., (2018) and Cinantya & Merkusiwati (2015) in their research found that there was no effect of liquidity on the possibility of financial distress. Besides financial distress can also be predicted through financial leverage. Leverage ratio is a ratio used to measure the extent to which a company's assets are financed from debt. Leverage indicates an influence on investment rates and investment opportunities in companies where the level of debt of a company will indirectly affect the interests and trust of investors in investing (Rohmadini et al., 2018). High and low corporate debt will affect the size of the risk of financial distress that will be borne by the company. Rohmadini et al., (2018), and Curry & Banjarnahor (2018) in their research found that leverage has a negative effect on financial distress, while research results from Bernardin & Tifani (2019) in their research found that there was no effect of leverage on financial distress. In addition to the above ratio, financial distress can also be predicted through firm size. The firm size illustrates how the total assets owned by the company. The greater the company's total assets, the company's financial condition will be more stable and stronger in dealing with the possibility of bankruptcy in the future. Bernardin & Tifani (2019) in their research found that there was a significant influence with a
Load more

Recommended publications
  • In Search of Distress Risk
    THE JOURNAL OF FINANCE • VOL. LXIII, NO. 6 • DECEMBER 2008 In Search of Distress Risk JOHN Y. CAMPBELL, JENS HILSCHER, and JAN SZILAGYI∗ ABSTRACT This paper explores the determinants of corporate failure and the pricing of financially distressed stocks whose failure probability, estimated from a dynamic logit model using accounting and market variables, is high. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with low failure risk. These patterns are more pronounced for stocks with possible informational or arbitrage-related frictions. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress. THE CONCEPT OF FINANCIAL DISTRESS has been invoked in the asset pricing lit- erature to explain otherwise anomalous patterns in the cross-section of stock returns (Chan and Chen (1991) and Fama and French (1996)). The idea is that certain companies have an elevated probability that they will fail to meet their financial obligations; the stocks of these financially distressed companies tend to move together, so their risk cannot be diversified away; and investors charge a premium for bearing such risk.1 The premium for distress risk may not be cap- tured by the standard Capital Asset Pricing Model (CAPM) if corporate failures ∗ John Y. Campbell is with the Department of Economics, Harvard University and NBER. Jens Hilscher is with the International Business School, Brandeis University. Jan Szilagyi is with Duquesne Capital Management LLC. The views expressed in this paper are those of the authors and do not necessarily represent the views of the authors’ employers.
    [Show full text]
  • Dealing with Secured Lenders1
    CHAPTER TWO Dealing with Secured Lenders1 David Hillman2 Mark Shinderman3 Aaron Wernick4 With investors continuing to pursue higher yields, the market for secured debt has experienced a resurgence since the depth of the fi nancial crisis of 2008. For borrowers, the lenders’ willingness to make these loans has translated to increased liquidity and access to capital for numerous purposes, including (i) providing working capital and funding for general corporate purposes; (ii) funding an acquisition-related transaction or a recapitalization of a company’s balance sheet; or (iii) refi nancing a borrower’s existing debt. The increased debt loads may lead to fi nancial distress when a borrower’s business sags, at which point management will typically turn to its secured lenders to begin negotiations on the restructuring of the business’s debt. Consequently, the secured lenders usually take the most active role in monitoring the credit and responding to problems when they fi rst arise. Secured loans come in many different forms and are offered from a range of different investors. The common feature for secured debt is the existence of a lien on all or a portion of the borrower’s assets. Following is a brief overview of the common types of secured lending: Asset-Based Loans. The traditional loan market consisted of an asset based lender (traditionally a bank or commercial fi nancing institution) providing revolving loans, term loans, and letters of credit secured by a fi rst priority lien on accounts receivable, inventory, equipment, and 1. Special thanks to Douglas R. Urquhart and Roshelle Nagar of Weil, Gotshal & Manges, LLP for their contributions to earlier editions of this chapter.
    [Show full text]
  • Financial Distress in the Life Insurance Industry: an Empirical Examination
    FINANCIAL DISTRESS IN THE LIFE INSURANCE INDUSTRY: AN EMPIRICAL EXAMINATION JamesM. Carson, Ph.D. Assistant Professor Department of Finance, Insurance and Law 5480 Illinois State University Normal, IL 61790-5480 U.S.A. Telephone: (309) 438-2968 Fax: (309) 438-5510 The financial condition of life insurers has received widespread public attention in recent years, especially with the failure of two large life insurers, Mutual Benefit Life and Executive Life, both in 1991. Failures of the magnitude of these two insurers and the increased frequency of insolvency suggest that a reexamination of the risk profiles of life insurers is warranted. The goals of the paper are to provide empirical evidence on the strength of three types of bankruptcy detection models and to identify significant variables in the early detection of financially distressed life insurers. The empirical methodologies include multiple discriminant analysis, logistic regression, and recursive partitioning (RP). An application of the RP methodology to insurance data has not been presented in the insurance or finance literature. Several variables and their relationship to the probability of insolvency are examined, including real estate, separate account assets,leverage, premium growth and other variables. The study utilizes data from the National Association of Insurance Commissioners for a sample of insurers that either did (1,380) or did not (40) remain solvent for the years 1990 and 1991. Improvements upon prior research are made in the areasof sample selection and the source of data collection. 1211 Les difficult& financihres dans le secteur de I’assurance vie : Examen empirique James M. Carson, PhD. Departement de finances, d’assurances et de droit 5480 Illinois State University Normal.
    [Show full text]
  • Acquirer Financial Constraints, Takeover Characteristics, and Short-Term Performance of Distressed Target Takeovers
    Acquirer Financial Constraints, Takeover Characteristics, and Short‐term Performance of Distressed Target Takeovers University of Amsterdam, Amsterdam Business School Master Thesis June 2015 Student: F. L. Gelens Student number: 10034714 Email: [email protected] Supervisor: dr. V. Vladimirov Faculty: Economics and Business Program: Business Economics, Finance Track Field: Corporate Finance, Mergers & Acquisitions Statement of Originality: This document is written by Student F. L. Gelens who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents. Abstract Many motives for corporate acquisitions have been investigated, however the takeovers of financially distressed targets are less well explored. The papers that investigate distressed target takeovers examine the takeover characteristics and their wealth effects for the target and acquirer shareholders. These papers however, do not investigate the possible influence of acquirer financial constraints on these factors. This study examines whether acquirer financial constraints are related to the premiums, payment method, and short‐term performance of distressed target takeovers. Despite inconsistent findings across the different financial distress measurements used, the results suggest that acquirers of financially distressed targets are more likely to pay with equity, and this likelihood is increased when the acquirer is financially constrained. Additionally, the results of this research suggest that mergers and acquisitions in which distressed targets are combined with a financially unconstrained acquirer, lead to the highest wealth effects for the target company.
    [Show full text]
  • A Theory of the Regulation of Debtor-In-Possession Financing
    Vanderbilt Law Review Volume 46 Issue 4 Issue 4 - May 1993 Article 4 5-1993 A Theory of the Regulation of Debtor-in-Possession Financing George G. Triantis Follow this and additional works at: https://scholarship.law.vanderbilt.edu/vlr Part of the Banking and Finance Law Commons, and the Bankruptcy Law Commons Recommended Citation George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 Vanderbilt Law Review 901 (1993) Available at: https://scholarship.law.vanderbilt.edu/vlr/vol46/iss4/4 This Article is brought to you for free and open access by Scholarship@Vanderbilt Law. It has been accepted for inclusion in Vanderbilt Law Review by an authorized editor of Scholarship@Vanderbilt Law. For more information, please contact [email protected]. A Theory of the Regulation of Debtor-in-Possession Financing George G. Triantis* I. INTRODUCTION .......................................... 901 II. THE REGULATION OF DIP FINANCING UNDER SECTION 364 ........................................ 904 III. FINANCIAL AGENCY PROBLEMS OF INSOLVENT FIRMS AND BANKRUPTCY LAW RESPONSES ............................. 910 IV. A MODEL OF JUDICIAL OVERSIGHT OF FINANCING DECISIONS UNDER SECTION 364 ................................. 918 V. CONCLUSION ............................................... 927 MATHEMATICAL APPENDIX ............................... 929 I. INTRODUCTION The profile of Chapter 11 of the Bankruptcy Code in public con- sciousness has surged recently. Other than the automatic stay on the enforcement of claims,1 the
    [Show full text]
  • Financial Distress Comparison Across Three Global Regions
    Journal of Risk and Financial Management FINANCIAL DISTRESS COMPARISON ACROSS THREE GLOBAL REGIONS Harlan D. Platt Northeastern University Marjorie B. Platt Northeastern University ABSTRACT Globalization has precipitated movement of output and employment between regions. We examine factors related to corporate financial distress across three continents. Using a multidimensional definition of financial distress we test three hypotheses to explain financial distress using historical financial data. A null hypothesis of a single global model was rejected in favor of a fully relaxed model which created individual financial distress models for each region. This result suggests that despite other indications of worldwide convergence, international differences in accounting rules, lending practices, managements skill levels, and legal requirements among others has kept corporate decline from becoming commoditized. 129 Journal of Risk and Financial Management I. INTRODUCTION As companies move production offshore they face a growing risk of supply-chain disruption caused by the possible financial distress of foreign suppliers. Receiving a 12 month early warning of impending supplier difficulties provides buying companies the opportunity to either remediate the supplier’s condition or to contract with another supplier. The choice of actions may depend upon the capacity utilization in that particular sector or the availability of other suppliers. A supplier early warning system for manufacturing firms is analogous to bankruptcy models that alert lenders or investors that an offending firm is unable to service its long-term debt. Unlike investment analysts for whom obtaining advance warning of bankruptcy is sufficient, corporate purchasers require advance warning of supplier financial distress, a condition which normally precedes bankruptcy by some period of time.
    [Show full text]
  • Troubled Debt Restructurings
    Journal of Financial Economics 27 (1990) 315-353. North-Holland Troubled debt restructurings An empirical study of private reorganization of firms in default* Stuart C. Gilson The Unicersity of Texas at Austin, Austin, TX 78712, USA Kose John and Larry H.P. Lang New York University, New York, NY 10003, USA Received November 1989, final version received May 1990 This study investigates the incentives of financially distressed firms to restructure their debt privately rather than through formal bankruptcy. In a sample of 169 financially distressed companies, about half successfully restructure their debt outside of Chapter 11. Firms more likely fo restructure their debt privately have more intangible assets, owe more of their debt to banks, and owe fewer lenders. Analysis of stock returns suggests that the market is also able to discriminate er ante between the two sets of firms, and that stockholders are systematically better off when debt is restructured privately. 1. Introduction With, the proliferation of leveraged buyouts (LBOs) and other highly leveraged transactions, there has been growing popular concern that the corporate sector is being burdened with too much debt. Much of this concern *We would like to thank Edward Altman. Yakov Amihud, Sugato Bhattacharya, Keith Brown, Robert Bruner, T. Ronald Casper, Charles D’Ambrosio, Larry Dann, Oliver Hart, Gailen Hite, Max Holmes, Scott Lee, Gershon Mandelker. Scott Mason, Robert Merton, Wayne Mikkelson, Megan Partch, Ramesh Rao, Roy Smith, Chester Spatt, Gopala Vasudevan, and Richard West for their helpful comments. We are especially grateful to Michael Jensen (the editor) and Karen Wruck (the referee) for their many detailed and thoughtful suggestions.
    [Show full text]
  • The Value of Bond Underwriter Relationships ∗
    The Value of Bond Underwriter Relationships ∗ Stine Louise Daetz, Jens Dick-Nielsen and Mads Stenbo Nielsen September 5, 2017 Abstract We show that corporate bond issuers benefit from utilizing existing underwriter relationships when rolling over bonds, but at the same time become exposed to un- derwriter distress. A strong relationship enables the underwriter to credibly certify the issuer resulting in lower direct issuance costs and lower underpricing. However, if the underwriter becomes distressed, this spills over to the issuer's credit risk, be- cause it weakens the relationship and increases the risk of involuntary relationship termination. The credit risk spillover is more pronounced for risky, opaque issuers with high rollover exposure, i.e., those issuers most in need of certification by an underwriter. Keywords: Underwriter relationship; Corporate bonds; Certification; Rollover risk; Relationship banking JEL: G12; G14; G21; G24 ∗The authors are from Department of Finance at Copenhagen Business School (CBS). Corresponding author is Stine Louise Daetz ([email protected]). We are grateful for helpful comments from Olivier Darmouni, Bj¨ornImbierowicz, Nada Mora, Florian Nagler, Lasse Heje Pedersen, Ramona Westermann, Charlotte Østergaard, conference participants at 2015 MFA meeting, 2017 NFN workshop, and seminar participants at the FRIC seminar and PhD Seminar Day at CBS. The authors gratefully acknowledge support from the Center for Financial Frictions (FRIC), grant no. DNRF102. Stine Louise Daetz is also affiliated with Danmarks Nationalbank and it is hereby noted that the views expressed in this paper are those of the author(s) and do not necessarily reflect the position of Danmarks Nationalbank. I. Introduction The value created by the relationship between an issuer of a security and the underwriter can be characterized as relationship capital (Rajan (1992), and James (1992)).
    [Show full text]
  • Costs of Financial Distress and Capital Structure of Firms
    COSTS OF FINANCIAL DISTRESS AND CAPITAL STRUCTURE OF FIRMS AYDIN OZKAN Thesis presented for the degree of D.PHIL UNIVERSITY OF YORK DEPARTMENT OF ECONOMICS AND RELATED STUDIES March 1996 CONTENTS Pages Acknowledgements iv Declaration V Abstract Vi List of Tables vii List of Figures viii Chapter 1 Introduction 1 Chapter 2 A Survey on Capital Structure Theories 10 2.1 Introduction 11 2.2 Modigliani and Miller Analysis 12 2.3 Bankruptcy Costs and Tax Savings 15 2.4 Personal and Corporate Taxation 24 2.5 Agency Costs 27 2.6 Asymmetric Information and Signalling Approach 31 2.7 Sources of Finance and Bargaining-based Theories of Corporate Finance 33 2.8 Conclusions 36 Chapter 3 Investment Incentives of Financially Distressed Firms 43 3.1 Introduction 44 3.2 The Model 48 3.2.1 Strategies in Period T 56 3.2.2 Strategies in Period T-1 59 3.2.3 Strategies in Period t 63 3.3 Conclusions 66 Chapter 4 Corporate Bankruptcies and the Role of Banks 68 4.1 Introduction 69 4.2 The Model 73 1 4.2.1 Strategy of Firm 2 78 4.2.2 Strategy of the Bank 81 4.2.3 Strategy of Firm 1 89 4.2.4 Determination of Debt Reduction Ratio 91 4.3 Generalisation of the Basic Model 93 4.3.1 Strategy of Firm 1 93 4.3.2 Strategy of the Bank 94 4.4 Conclusions 97 Chapter 5 Economics of Insolvency Procedures and Inefficient Company Liquidations 99 5.1 Introduction 100 5.2 The Role of Bankruptcy Law and Existing UK Procedures 102 5.2.1 The Role of Bankruptcy Law 102 5.2.2 The UK Insolvency Procedures 103 5.2.2.1 Liquidation 103 5.2.2.2 Receivership 104 5.2.2.3 Administration 105
    [Show full text]
  • The Determinants of Financial Distress of Basic Industry and Chemical Companies Listed in Indonesia Stock Exchange
    Review Of Management And Entrepreneurship Volume 01/ Nomor 02/2017 The Determinants of Financial Distress of Basic Industry and Chemical Companies Listed in Indonesia Stock Exchange *Nurhayati1, Anna Mufidah2, Asna Nur Kholidah3 1, 2, 3 University of Jember, Jember 68121, Indonesia *Corresponding Author. E-mail: [email protected] Abstract Understanding the factors that determine financial distress would help management prepare anticipating actions and anticipate the worst possible situation in the future. This study examines four fundamental factors of companies in the basic industry and chemical sectors listed at the Indonesian stock exchange. Nineteen companies were classified as financially distressed and thirty-three non-financially as distressed companies. The logistic regression test revealed debts to assets ratio (positive), current ratio (negative), and return on assets (negative) became predictors for possible financial distress. Total assets turn over did were not able to predict whether the companies belonged to financially distressed or non-financially distressed. Keywords: Financial distress; financial ratios; liquidity. 1. Introduction company’s financial position in a certain period, reflecting the company’s performance in the The purpose of this study is to examine corresponding period. An analysis of the company’s whether financial distress can be predicted using financial ratios could provide information about the financial ratios. The financial distress prediction has financial condition and provide a valuation process been examined in numerous studies. The initial study that aims to evaluate the financial position of the by Altman (1968) showed that some accounting company’s operational results in a certain period. variables were able to predict the potential of One indicator that can be used as a criterion companies to experience financial distress.
    [Show full text]
  • Corporate Debt Restructuring: Evidence on Lender Coordination in Financial Distress
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Brunner, Antje; Krahnen, Jan Pieter Working Paper Corporate debt restructuring: Evidence on lender coordination in financial distress CFS Working Paper, No. 2001/04 Provided in Cooperation with: Center for Financial Studies (CFS), Goethe University Frankfurt Suggested Citation: Brunner, Antje; Krahnen, Jan Pieter (2001) : Corporate debt restructuring: Evidence on lender coordination in financial distress, CFS Working Paper, No. 2001/04, Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M., http://nbn-resolving.de/urn:nbn:de:hebis:30-9811 This Version is available at: http://hdl.handle.net/10419/25375 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents
    [Show full text]
  • Interpreting the Pari Passu Clause in Sovereign Bond Contracts: It’S All Hebrew (And Aramaic) to Me
    Interpreting the Pari Passu Clause in Sovereign Bond Contracts: It’s All Hebrew (and Aramaic) to Me Mark L. J. Wright May 2014 Federal Reserve Bank of Chicago Reserve Federal WP 2014-06 May 4, 2014 Interpreting the Pari Passu Clause in Sovereign Bond Contracts: It’sAll Hebrew (and Aramaic) to Me Mark L. J. Wright Federal Reserve Bank of Chicago, and National Bureau of Economic Research ABSTRACT In this comment, we take a helicopter tour of the history of notions of “equality” and “justice” in sovereign debt restructuring in particular, and in the division of property more generally, and show that these concerns have existed for centuries, if not millennia. We argue that the issue at stake in the interpretation of the pari passu clause is not so much the treatment of holders of identical claims– it is now customary to treat them identically– but whether the holders of different claims should be treated differently. We show that exists a customary “principle of differentiation” that allows creditors with claims that differ in specific ways to be treated preferentially. One of these specific differences concerns debts that have been reduced in value during a previous debt restructuring or default, and based on this principle we conclude that the New York court has, if not completely misinterpreted the meaning of the pari passu clause, then at least misapplied it. Keywords: Sovereign debt restructuring, pari passu, Argentina, inter-creditor equity. JEL Codes: D63, F34, K12 To appear in the Capital Markets Law Journal. Senior Economist and Research Advisor, Federal Reserve Bank of Chicago, and Faculty Research Fellow at the National Bureau of Economic Research.
    [Show full text]